Shares in company fall 12.35%

Fisker said it would extend the Karma's North American warranty from 50 months/50,000 miles to 60 months/60,000 miles.

DETROIT (Reuters) -- A123 Systems is replacing lithium-ion battery modules and packs that could fail due to a manufacturing defect, a problem that recently led to the high-profile shutdown of the Fisker Karma luxury sedan during testing by Consumer Reports magazine.

A123 said it discovered defects in certain cells made at its plant in suburban Detroit that CEO David Vieau said can "result in premature failure of the battery module or pack, including a decrease in performance and reduced battery life."

The company, which developed as a start-up at the Massachusetts Institute of Technology, has begun building replacement modules and packs, and expects to begin shipping them to five affected corporate customers this week, he told reporters on a conference call today.

Vieau said A123 was unaware of any accidents or injuries related to the defect and said the defect did not create a safety issue. However, he acknowledged the defect led the Karma electric car to shut down on March 7 during testing by widely followed consumer magazine Consumer Reports.

A123 expects the replacement to cost about $55 million and that it will be funded over the next several quarters.

Vieau said the company had sufficient liquidity for the campaign but the situation would likely lead to the adjustment of A123's fundraising strategy. He declined to say how many modules or packs were being replaced.

A123 shares closed the day down 12.35 percent to $1.49 a share on the Nasdaq.

Fisker, in a statement, said today it would enhance its current customer service program to include a free battery replacement and an extension to the Karma's North American warranty from 50 months/50,000 miles to 60 months/60,000 miles.

On March 13, Fisker notified customers that it was addressing the problem with a team of 50 engineers.

"The Karma performed exactly as it was designed to," CEO Tom LaSorda said in a letter sent to customers. "The onboard diagnostics detected a fault and entered a protection mode that shut the car down to protect other components."

Electric vehicle troubles

A123's problems were another blow for the electric-vehicle industry still in its infancy and struggling with bad publicity. Last fall, U.S. safety regulators opened a probe into the safety of the batteries in General Motors' Chevrolet Volt plug-in electric car. A123 does not make those batteries.

The probe was subsequently closed and no defect was found, but it hurt Volt sales. GM has idled the Michigan plant that builds the car for five weeks due to weak demand.

Other smaller start-ups in the electric-vehicle sector have closed or filed for bankruptcy due to lack of funding. A123 posted a wider-than-expected fourth-quarter loss this month after Fisker, one of its largest customers, cut battery orders.

President Barack Obama's administration has been a strong proponent of electric vehicles and set a goal of getting 1 million battery-powered vehicles on the road by 2015.

But since the bankruptcy of Solyndra, a solar panel maker that received $535 million in U.S. loan guarantees, federal support for advanced vehicle technology programs has ground to a halt. Industry officials and analysts point to tightened U.S. Department of Energy requirements in the face of withering criticism from Republicans about the Obama administration's generosity for anything related to green technology.

A new industry

"There is absolutely no time to have battery problems," A123's Vieau said. "This is a new industry with a new technology that's in the process of a learning curve. It's expected that in this environment, there will be challenges.

"We're going to weather those," he added.

A small number of A123's battery packs in the field experienced a malfunction and the company subsequently discovered one of four automated welding machines at the Michigan plant was not correctly calibrated, Vieau said. The problem caused a misalignment of a certain part in some prismatic battery cells that could lead to an electrical short.

The replacement program does not affect cells made with the other three welding machines in the Michigan plant or those built in other A123 plants, he said. Chinese plants that build a different type of cylindrical cell used by such customers as BMW also were not affected.

WALTHAM, Mass., March 26, 2012 (GLOBE NEWSWIRE) -- A123 Systems (Nasdaq:AONE), a developer and manufacturer of advanced Nanophosphate® lithium iron phosphate batteries and systems, today announced that the company has launched a field campaign to replace battery modules and packs that may contain defective prismatic cells produced at A123's Livonia, Mich. manufacturing facility. A123 has begun building replacement modules and packs and expects to begin shipping them to impacted customers this week. The company anticipates that the cost of replacing the affected customer modules and packs will be approximately $55 million and expects it will be funded over the next several quarters.

"Recently, A123 has discovered that some prismatic cells made in our Livonia facility may contain a defect which can result in premature failure of a battery pack or module that includes a defective cell. We have isolated the root cause of the defective cells and we are confident that we have pinpointed the source of the defect and corrected it. As a result of engineering analysis and testing, we believe this is not a safety issue, and we have determined the root cause and have taken corrective actions," said David Vieau, CEO of A123 Systems. "We are working to get replacement packs and modules to impacted customers as quickly as possible. It is important to note that this defect has been discovered only in some prismatic cells manufactured at our Livonia facility. Prismatic cells produced at another A123 facility are not impacted. Further, the cylindrical cells we make at our facilities in China for a number of other transportation programs, as well as the majority of our grid energy storage systems and commercial applications, are also not affected by this defect."

Vieau continued, "In parallel with this field campaign, as we have discussed previously, we continue to implement actions that we believe will improve operations and minimize the possibility of quality issues going forward. This includes hiring a Chief Operating Officer, Ed Kopkowski, who has more than 25 years of global management and operational leadership in improving quality and reducing costs. A123 has produced hundreds of thousands of high-quality prismatic cells at another facility, so while the initial rapid ramp up of our Michigan operations to satisfy customer demand has resulted in near-term operational challenges, we are confident in our ability to overcome these issues. We are devoting our full resources to fixing this situation and moving forward to continue delivering high-quality products to our customers."

Additional information and ongoing updates about A123's Livonia prismatic cell field campaign can be found online, CLICK HERE.